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[humpty_dumpty]

Not to hijack the post about someone’s son needing a truck, I wasn’t surprised to read many people advised not buying a car on a loan. What was surprising, though, was how categorical the mindset appeared to be. As if it applies to all people under all circumstances.

Well, it doesn’t.

When we’re talking, say, 2008 Civic vs. 2012 Lexus, the “drive old and save” maxim makes perfect sense. But for most of us, it’s actually closer to 2008 Civic vs. 2000 Focus, and this is a totally different cup of tea.

I wonder if active proponents of this theory ever drove old cars. They break down, you know. While new cars break down too, an old car means no warranty, no loaner for the repair period, no towing compensation, and poorer parts availability – all leading to additional expenses; and then, the older the car, the more numerous and costly its needs are. That’s why old cars are cheap.

I don’t know about the US/Canada, but most European fleets replace their cars - and we’re talking BMWs and Audis here - at 5 years/120,000 kilometers, whichever comes first, because after that, keeping them running no longer makes sense economically. And there’s a lot of math and trial and error behind this.

The math I did when I was considering the car I’m driving now, was that my previous car cost me about $1200 a year in repair bills (and that was likely to increase, naturally).  So, as long as my interest on the car loan didn’t exceed this amount annually, I wasn’t losing anything. I was, in effect, paying the interest out of the repair bills I didn’t have to pay with the new car.

I was probably even gaining, if you figure in lost profit from jobs I’d have to cancel when the old clunker needed to be fixed, and other, less countable issues. Like, when you have to pay for the manual therapy for the spine condition you developed from driving a clunker with misshapen seats, or, having to spend two weeks in bed with a cold you get from waiting for two hours in the dead of winter for the tow truck because of the minor issue with a broken coolant hose, like my wife did - which budget category do you file the expense under? Yet, these issues wouldn’t happen with a better car. A newer model will probably be more comfortable as well – which means you’ll be less tired from driving and so have more energy for work, family, etc. You can’t really put an economic value to that; I just assume it offsets the loss in resale value and the insurance payments.

If there’s anyone who wants to say “My 1991 Camry  went 400,000 miles without as much as sparking plugs change” – fine, I’m glad yours did. If you’re sure you can repeat this experience with another 1991 Camry – by old means do so. I’m not trying to encourage anyone to go out anв get a car loan. It’s a good idea to do some math before you do, in any situation.

What I’m trying to say is, situations differ, and a good choice for one may not be so good for someone else. Allow for this before offering categorical advice – we’re academics or what, after all?   

[daniel_von_flanagan]

I thought this was going to be about prostitutes.

Oh well, time to go look at that thread about the colleague who is negligeed. - DvF

[lasquires]

I'm a little curious about why you're posting this here, though I agree with you for the most part. My spouse and I share a single vehicle, and we're dependent on said vehicle to get to work, the grocery store, etc. We need that vehicle to be reliable, so we are not inclined to drive a piece of junk until it falls apart around us. Once our last car started needing very expensive repairs at 125k miles, we replaced it. We intended to buy a 1-2 year old car, but given shortage of small used cars and the inflated prices, we found that we could do much better buying new, and thanks to good credit scores, we're not paying a dime in interest over five years. Last time I bought a car (2004), you could still get a small, reliable Japanese sedan with <50,000 miles on it for $10-12k, quite a bit less than the same car brand new. No more.

However, it's not just the interest that you need to be considering when you make this decision. If your current clunker is paid for, you need to consider the actual car payments you would be making, money you are putting into a depreciating asset. An old car is already depreciated. That fact is reflected in the price. So, let's do the math. $1200 in repairs is the equivalent of a little more than 4 months worth of car payments. So, if I pay that $1200, and the car runs for four more months, I've broken even. If the car runs for more than that, I've come out ahead. At some point, the price of keeping the car running does radically outpace the cost of making car payments. For us, that was around $4000 (new transmission, catalytic converter, and air conditioner compressor in a climate where A/C is not optional). Of course, you do have to factor in the intangible and highly variable costs of inconvenience and constantly having to worry about your car breaking down at a bad time.

[rugger]

I do not think the recommendations are always in favor of an old car versus a new car. The smart move seems to be to buy a 2-3 year old car that still has plenty of miles left before needing repairs, but has lost the initial value one loses when they drive off of the lot.

[concordancia]

Yes, most of the recommendations I have seen are for a technically used car, over a new car.

I am also curious as to why you are only counting the interest, rather than the principal and interest, in your math?

[prytania3]

New only.

[cgfunmathguy]

What you didn't figure in was depreciation. My choices when I totaled my last car were a 2007 Civic, a 2001 Lexus, and a 2010 Civic. Now, the Lexus would have been sweet, but I wasn't willing to deal with the mileage issues compared to the two Civics. I could have afforded the 2010, although it would have meant having a payment. The problem was that the 2007 was new enough that warranty didn't matter and maintenance costs (oil changes, tire rotations, etc) were similar to the 2010. Mileage was essentially a wash.

Mathematically, taking out a loan for a depreciating asset rarely makes sense. You actually pay about 150% of the quoted price when the interest is factored in, and you pay about double the quoted price when you add in both interest and depreciation. As an individual, you don't get to take the depreciation expense off your income for tax purposes. It's actually why buying slightly used (a 2008 or 2009) car for cash instead of a new (2011 or 2012) car on credit makes more sense.

Of course, if your ego tells you that you MUST have a new car, consider the increased costs based on interest and depreciation to be "ego tax." The money advisor that most of us use (Dave Ramsey) to make the recommendation to "go used" calls it "stupid tax" because people leave out depreciation, among other things, when figuring that a brand-new car is a better buy than a slightly used car.

[prytania3]

Mathematically, taking out a loan for a depreciating asset rarely makes sense. You actually pay about 150% of the quoted price when the interest is factored in, and you pay about double the quoted price when you add in both interest and depreciation.

What do mean by adding the interest and depreciation? Depreciation is simply an accounting term. What you actually pay is the principal + interest. You don't *pay* depreciation.

The depreciation was only a real factor in the olden days when people like my parental units traded in the Cadillac every two years for the latest model. I bought my Tacoma new. I've had it for 8 years. I had payments for 5 of those years. Just recently I had to make maintenance repairs: brakes, clutch, timing belt and water pump, and I put in all new belts just for the hell of it. Had I bought it used, I would have had much higher maintenance costs at the end--or I wouldn't be able to keep it for 8 years. It has 93K miles only, so Prylet has the truck he wanted.

I'm driving a new 2012 Hyundai Elantra, and I'm sure I'll drive it a long time.

[lasquires]

I am not even kidding you when I say that this summer, there were 2010 Elantras with 40k+ miles on them selling for about $1000 less than brand new. That's not a deal. Edmund's recently published a huge list of cars for which the price of a new one is similar or occasionally less than a one year old model. Granted, it's a freak situation that probably won't last, but that's the economy we're in right now.

[cgfunmathguy]

Mathematically, taking out a loan for a depreciating asset rarely makes sense. You actually pay about 150% of the quoted price when the interest is factored in, and you pay about double the quoted price when you add in both interest and depreciation.

What do mean by adding the interest and depreciation? Depreciation is simply an accounting term. What you actually pay is the principal + interest. You don't *pay* depreciation.

You pay the principal, no matter what. The OP was doing comparative analysis, in which the principal is a wash. If you're going to drive a car into the dirt (like I do and like Pry seem to), then depreciation doesn't matter because it's being junked or donated at the end. OTOH, if you intend to trade it at some point, you *pay* depreciation in the difference between the price you paid and the trade-in value. Selling a car (or trading it) at the point you worry about repair costs requires that depreciation be taken into account.

ETA: 2010 is not something I'd consider "slightly used" during this past summer, even with 40k+ miles.

[larryc]

the older the car, the more numerous and costly its needs are. That’s why old cars are cheap.

Who knew?

[zuzu_]

Before I went to grad school, I worked at a care dealership: one year in sales, and another year in service. I learned a lot.

For low-end cars (such as an entry-level Focus and similar types of cars), I agree that it's often a better deal to buy new, or even lease new (depending on the lease deals). I, for example, leased a brand new car for three years paying like $180/month. There were no repairs, and my only maintenance expenses were oil changes and tire rotations. Plus, I had ZERO hassles and drove a new car. SO worth it. For many years I bought and leased a series of these types of cars: Saturn, Focus, Cobalt, Forenza...whoever had the best deal. My payments were always under $200/month with very little to no money down.

I bought my first used car this year because we make a little money and we wanted something nicer. I paid cash for a sweet 2002 Avalon.

[pedanterast]

What do mean by adding the interest and depreciation? Depreciation is simply an accounting term. What you actually pay is the principal + interest. You don't *pay* depreciation.

Buy a car for $20,000 and sell it for $12,000.  Depreciation = $8,000.  Forget about financial accounting and think about managerial accounting.  Differential costs?  Salvage value?  Net present value?  Hello?

[prytania3]

What do mean by adding the interest and depreciation? Depreciation is simply an accounting term. What you actually pay is the principal + interest. You don't *pay* depreciation.

Buy a car for $20,000 and sell it for $12,000.  Depreciation = $8,000.  Forget about financial accounting and think about managerial accounting.  Differential costs?  Salvage value?  Net present value?  Hello?

Sure, but again, that goes back to people who trade in their cars every two years. That's what my parental units used to do. And anyway, I don't even think you get hit that hard on lower end cars these days. Or any cars. If you pay 20K for a car, it's not going to be worth only 12K after you drive it off the lot. That's f***ing urban legend.

[wet_blanket]

Doesn't it also depend on how long you intend to have the car, even if you're paying cash and don't need to think interest?  For example, paying $15,000 for a new car you expect to keep 12 years is a better idea than paying $12,000 for a car you expect to last 8 years, unless you think you're approaching the end of your driving life.